Old Dominion has a strong quarter even as its costs trend upward

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In an otherwise blowout quarter for Old Dominion—the latest in a string of tremendous earnings report from company after company in the trucking sector—one set of line items raised its head: costs.

The LTL carrier posted a 16.1% growth in operating income compared to the first quarter of 2017, and an 11.8% growth in net income, even as some cost measurements were significantly higher. For example, the category of salaries, wages & benefits jumped to $501 million from $416.5 million a year earlier, and operating supplies and expenses rose to $114.6 million from $90.9 million. Other expenses categories were more muted.

Adam Satterfield, the company’s CFO and executive vice president who led most of the Old Dominion earnings call with analysts, said he expected costs per shipment to be up 4-4.5% per this year, “and probably on the north end of that range.” But he said that in the first quarter, cost inflation per shipment was probably “a little north of 7%” when fuel is not considered. “There were different cost elements going on,” he said.

Satterfield, however, is confident enough in having cost growth settle into the 4-4.5% range that when asked about Old Dominion’s operating ratio going forward, he said its trend into the second quarter will be in line with past performance. Old Dominion’s operating ratio was 83.9 in the first quarter of 2018, improving from 85.7% in the corresponding quarter of 2017.

The operating ratio tends to improve about 400 points from the first to the second quarter, according to an analyst’s question. Satterfield was asked if there was anything that might make that normal trend more “muted” in the quarter.

The cost outlook “could make things interesting about the second quarter, but we will continue to be disciplined on costs and we will make strides in our productivity,” Satterfield said, adding that he did not foresee anything that would lead the company to believe the operating ratio would shift significantly away from past trends.

“At the end of the day we were able to get revenue per shipment increases to offset the cost per shipment increases that we experienced in the first quarter and so that was a big driver of the operating ratio improvement,” Satterfield said.

Neither Satterfield nor current COO and CEO-in-waiting Greg Gantt would comment on pricing specifics. Satterfield said it was a strong pricing environment—no surprise there—and that it was in line with Old Dominion’s goals. “Our pricing philosophy has been what I said, to try to get the necessary increases,” he said. “And when you look back since 2001, revenue per shipment has averaged a 4.8% increase versus our cost per shipment increasing 4%.”

The positive operating numbers otherwise poured out of the Old Dominion earnings:

  • LTL tons were up 15.4%
  • Tonnage per day rose by the same amount, 15.4%
  • Shipments were up 10.5%
  • Revenue per intercity mile climbed 6.2%.
  • Revenue per hundredweight was up 5.9%.
  • And for April already, LTL tons per day are up almost 16% compared to last year.

The average weight per shipment slid through the quarter, which was the focus of several analyst questions. Sadderfield said it was about 1,660 pounds in December, dropping to 1,640 in January, to 1,625 in February and March, “and now we’re right at about 1,600.”

Sadderfield said that is not necessarily a metric in which a rising number is a good thing. A weight of 1,600 pounds would put the company back at a level from a few years ago, “and that would be a good thing for us.”

The number of shipments is far more important than the weight, according to Sadderfield. “Every indicator that we have and feedback that we're receiving from customers continues to show signs of strength with the economy, and we don't necessarily think that any pullback in our weight per shipment would suggest otherwise,” Sadderfield said.

One analyst posed a hypothetical: was an LTL carrier like Old Dominion getting “spillover” business from customers who couldn’t move their goods through the normal truckload carriers, because they’re so booked and dealing with driver shortages. Satterfield indicated the company wasn’t seeking that kind of customer.

“We try to control the growth,” he said. Such queries would come in to the company on a spot basis, “and basically we turn up the rates to try to make sure that our operations doesn't get overwhelmed with any heavy weighted transactional type shipments.” Such business would be considered a one-off, “and it's not consistent business that we would retain.”